A thing I’m thinking about (inspired by Doughnut Economics): In the US, we think of money as being made by the Treasury Department. We worry, rightly, about increasing the money supply arbitrarily by just printing more. Unbounded monetary creation has inflationary tendencies. (Whether or not we currently strike the right balance is irrelevant to the rest of this discussion.)
Banks cannot create money, officially at least. However, they can issue loans in excess of the reserves they hold, so they kind of can create money. I don’t have the data to compute it, but the financial crisis of 2008 supports a claim that this system has created excess financial resources beyond the official money that backs it.
This money can only be used for certain types of spending. Three major things this loan money is spent on are houses, financial assets, and college loans. (Another major, interestingly different category is business loans.) Housing, the stock market, and college cost are all areas where we see constant growth that exceeds general inflation. In the first two, we’ve framed that as a good thing indicating economic health. However, all three share the same underlying mechanism of relying on the excess loan based money supply as an input into their growth.
I’m not drawing any particular conclusion here. Maybe these things are good for our economy overall. I have my suspicions that they are more short term extractive growth than long term value producing growth, but that’s my hunch.
Rather, my purpose here is to illustrate that policy and mechanisms make a substantial difference in outcomes. I don’t know if our economic situation would look better or worse if, for example, all loans had to be backed by currency held by the issuing institution. However, it would certainly look different in interesting and impactful ways.